Bets on lower interest rates in New Zealand firmed after the central bank said a gauge of inflation expectations plunged to its lowest level in almost 22 years.
Two-year ahead inflation expectations fell to 1.63% from 1.85%, according to a quarterly survey of businesses published on the Reserve Bank of New Zealand’s website Tuesday. That’s the lowest since the second quarter of 1994 and well below the 2 percent midpoint of the central bank’s 1-3 percent target range.
“Low inflation expectations may start to impact wage claims and price setting behavior, in turn leading to even greater downward pressure on inflation,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland, who expects the RBNZ to lower the official cash rate further this year. “We currently expect the first OCR cut to occur in June, but today’s data raises the risk that the RBNZ could move sooner.”
The New Zealand dollar fell about half a U.S. cent on the data to 66.15 U.S. cents at 3:15 p.m. in Wellington. Financial markets are now pricing in a better than 60 percent chance that the RBNZ will cut the benchmark rate by June, according to swaps data compiled by Bloomberg.
RBNZ Governor Graeme Wheeler signaled Feb. 3 he won’t rush to cut the OCR again to combat near-zero inflation. He reduced the rate four times last year to 2.5 percent, a record low. However, he said his goal is to anchor inflation expectations close to the midpoint to the target range.
“We would not wish to see inflation expectations become unstable or decline significantly,” Wheeler said.